Contract farming can revive India’s agriculture

Mutual trust and confidence in farm-firm relationships are important conditions for contract farming arrangements. Experience shows neither parties want law enforcement to intervene, with marginal farmers being affected the most

Contract farming works informally in the Indian economy. Although it benefits farmers by providing assured market transactions for an acceptable quality of produce, the lack of a written contract adversely affects the interests of farmers who are vulnerable to exploitation by those with capital in their possession.

For a long time, there was no comprehensive policy to regulate the actions and clauses of agreements in contract farming. Public good requires that steps to increase competition and create market-related incentives for both contractors and farmers be developed. Farmers should be more connected to the market (mandis) in order to get proper information and inputs at the right time. e-NAM (National Agriculture Market) has so far been able to enrol just 585 mandis in the country which leaves out a significant proportion of them. Also, e-auctions are still conducted by commission agents. The government needs to train farmers to auction their produce themselves, for more states to participate in e-NAM.

Mutual trust and confidence in farm-firm relationships are important conditions for contract farming arrangements. The Model Contract Farming Model Act, 2018, aims to create a regulatory body to enforce contracts. Experience shows that neither parties want law enforcement to intervene, with marginal farmers being affected the most. Village level courts, subsidised legal support and minimum prices will ensure a fairer settlement.

Under the current system, the farmer is paid only after the crop has been harvested and sold, leaving him at the mercy of the company’s discretion. Instead, there should be a database of companies readily available to farmers for information and backgrounds of the companies they engage with. The imbalances in market power, opportunistic behaviour and other unfair practices have all acted as a drag on contract farming. Risk-sharing clauses and transparent contract terms must be enforced to enable better coordination.

The results from several contract farming models show that net profits for contract farmers were more than double those for non-contract farmers. The share of marketing and transactional costs to total cost was much lower for contract farmers.

Contract farming has the potential to revive agriculture if it is properly implemented. Though the draft Model Contract Farming Act, 2018, does address many of these issues, it has not been mandatory for states to adopt it as agriculture is in the concurrent list. Some constitutional amendments would be desirable to implement enabling changes on the ground in order to address farmer distress.